Dyer v. Eastern Trust and Banking Company, Civ. No. 1872.

• Court: United States District Courts. 1st Circuit. United States District Court (Maine)
• Writing for the Court: GIGNOUX
• Citation: 336 F. Supp. 890
• Parties: Edythe L. R. DYER, Plaintiff, v. EASTERN TRUST AND BANKING COMPANY et al., Defendants.
• Docket Number: Civ. No. 1872.
• Decision Date: 30 December 1971

336 F. Supp. 890

Edythe L. R. DYER, Plaintiff,
v.
EASTERN TRUST AND BANKING COMPANY et al., Defendants.

Civ. No. 1872.

United States District Court, D. Maine, N. D.

December 30, 1971.

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Louis Rene Marcou, Waterville, Me., Gael Mahony, Joseph D. Steinfield, Joseph D. Hinkle, Boston, Mass., for plaintiff

Robert J. Hallisey, Francis H. Fox, Joseph F. Hunt, III, Joseph P. Rooney, Peter M. Saparoff, Boston, Mass., Arnold L. Veague, John E. McKay, Bangor, Me., for defendants.

OPINION AND ORDER OF THE COURT

GIGNOUX, District Judge.

This action arises under the Securities Act of 1933 ("the Securities Act"), the Securities Exchange Act of 1934 ("the Exchange Act"), and the Maine Blue Sky Law. Plaintiff Edythe L. R. Dyer is a citizen of the State of Maine, formerly a stockholder of defendant Eastern Trust and Banking Company ("Eastern Trust"), and presently a stockholder of defendant Northeastern Bankshares Association ("the Association").

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Eastern Trust is a Maine trust company. The Association is a Maine bank holding company. The individual defendants are all citizens of Maine and at times relevant to this litigation were all officers and/or directors of one, or both, of the corporate defendants

The amended complaint ("the Complaint") contains ten counts, each purporting to state a separate claim. Presently before the Court are defendants' motions for summary judgment; defendants' motions to dismiss, or in the alternative to strike portions of, the Complaint; and defendant McDonald's separate motion to dismiss certain counts of the Complaint in which he is named as a defendant.

I

SUMMARY OF THE COMPLAINT

The ten counts of the Complaint are based on two separate but related series of transactions.

A. Transactions in 1968 and 1969.

Prior to March 18, 1969, plaintiff was the owner of 1,525 shares of stock in Eastern Trust. During the spring and summer of 1968 certain of the individual defendants and Eastern Trust devised a plan whereby the Association would be created as a bank holding company under Maine law to own all the shares of Eastern Trust. The Association was then created by six of the individual defendants.¹ The Association, in turn, established Kenduskeag Banking Company ("Kenduskeag") under the Maine banking laws as a wholly-owned subsidiary. It was never intended that Kenduskeag, which has been variously described as an "interim" or "phantom" bank, would carry on any banking business. Eastern Trust thereafter sent out to plaintiff and the other stockholders of Eastern Trust a proxy statement ("the 1968 Proxy Statement") for a special meeting of stockholders to be held on October 10, 1968, at which the Eastern Trust shareholders would be asked to approve a Plan of Reorganization ("the 1968 Reorganization") whereby (1) Eastern Trust and Kenduskeag would merge, with Eastern Trust the survivor; (2) each shareholder of Eastern Trust who did not dissent would relinquish his shares and receive Association shares; and (3) the Association would own all shares of Eastern Trust and the former shareholders of Eastern Trust would own shares in the Association (in the ratio of four shares of the Association for one share of Eastern Trust). The Plan was approved at the special meeting of the stockholders of Eastern Trust held in October 1968. Thereafter, when the various conditions specified in the Plan (including the obtaining of an opinion from counsel that the distribution of Association shares to the Eastern Trust stockholders was exempt from the registration requirements of Section 5 of the Securities Act, a "no-action" letter from the Securities and Exchange Commission, and a favorable tax ruling from the Internal Revenue Service) had been satisfied, the Plan was declared effective on March 18, 1969, and plaintiff, along with the other stockholders of Eastern Trust who did not exercise their cash appraisal rights, became a stockholder of the Association, and the Association became the owner of all the stock of Eastern Trust.

B. Transactions in 1970.

The second series of transactions upon which the Complaint is based occurred in 1970 and involved the acquisition by the Association of all the shares of stock in three more banks: First-Manufacturers National Bank of Lewiston, Maine ("First Bank"), The Peoples National Bank of Farmington, Maine ("Peoples Bank") and Westbrook Trust Company of Westbrook, Maine ("Westbrook Trust"). These acquisitions ("the 1970 Acquisitions") were carried out by

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means of an exchange offer made by the Association, in which it offered to the stockholders of the banks to be acquired stock of the Association at designated ratios in exchange for stock of the other banks. The stock issued in the exchange by the Association was registered pursuant to the Securities Act, and a statutory prospectus ("the 1970 Prospectus") was delivered to all the stockholders of the banks to be acquired. The 1970 annual meeting of the Association was held on March 16, 1970. Prior to the meeting, the Association sent out to plaintiff and the other stockholders of the Association a proxy statement for the meeting ("the 1970 Proxy Statement"), together with a copy of the 1970 Prospectus. The 1970 Proxy Statement solicited the proxies of the stockholders of the Association to vote for the re-election of certain directors on the understanding that these directors, if elected, would effectuate the 1970 Acquisitions. In addition, the 1970 Proxy Statement solicited proxies to vote for the election of additional directors who would take office on the consummation of the 1970 Acquisitions and would represent the interests of First Bank, Peoples Bank and Westbrook Trust. The required proxies were received at the annual meeting, and the 1970 Acquisitions were consummated on or about April 10, 1970. Prior to the consummation of the 1970 Acquisitions, the former stockholders of Eastern Trust were the owners of all the outstanding shares of the Association. Following the consummation of the 1970 Acquisitions, the former stockholders of Eastern Trust were the owners of approximately 35.27 per cent of the outstanding shares of the Association.²

C. Summary of the Counts.

The First through the Sixth Counts of the Complaint deal with the 1968-69 transactions. They are brought against all the defendants and can be summarized as follows:

First Count. This count is brought under Section 12(1) of the Securities Act (15 U.S.C. § 77l(1)) for liability allegedly resulting from the offer and sale of securities of the Association which had not been registered with the Securities and Exchange Commission in violation of Section 5 of the Securities Act (15 U.S.C. § 77e). The Complaint alleges that the exemption of state statutory mergers from the registration requirements of the Securities Act set forth in Rule 133 of the Securities and Exchange Commission (17 C.F.R. § 230.133) was inapplicable to the 1968 Reorganization because defendants failed to comply with the merger requirements of Maine law.

Second, Third and Fourth Counts. These counts are brought, respectively, under Sections 12(2) and 17(a) of the Securities Act (15 U.S.C. §§ 77l(2) and 77q(a)) (Count II); Section 10(b) of the Exchange Act (15 U.S.C. § 78j(b)) and Rule 10b-5 (17 C.F.R. § 240.10b-5) promulgated thereunder by the Securities and Exchange Commission (Count III); and Section 14(e) of the Exchange Act (15 U.S.C. § 78n(e)) (Count IV). They allege misstatements and omissions in the 1968 Proxy Statement. The alleged misstatements and omissions include the failure of defendants to inform plaintiff that the 1968 Reorganization was not a valid statutory merger under Maine law and that therefore the exchange of securities in connection therewith was not exempt from registration under the Securities Act and the Maine Blue Sky Law; that plaintiff was not bound by the Maine merger statute to elect either to accept shares in the Association or to seek appraisal of her Eastern Trust shares; and that defendants contemplated and were negotiating for the acquisition of the three additional banks which were acquired in

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1970 and which resulted in the substantial dilution of plaintiff's interest in the Association

Fifth and Sixth Counts. The Fifth and Sixth Counts are brought under principles of pendent jurisdiction for violation of the Maine Blue Sky Law, 32 M.R.S.A. § 751 et seq. They allege, respectively, misstatement and non-disclosure of material facts in the 1968 Proxy Statement in violation of 32 M.R.S.A. § 881 (Count V) and failure to comply with the registration requirements of 32 M.R. S.A. §§ 871 and 881 (Count VI). The Complaint alleges that the exemption pertaining to statutory mergers found in 32 M.R.S.A. § 874 did not apply because of the alleged invalidity of the merger.

The Seventh through the Tenth Counts of the Complaint deal with the 1970 Acquisitions. They are brought against the Association and those individual defendants who were then serving as officers and directors of the Association. The counts can be summarized as follows:

Seventh, Eighth and Ninth Counts. These counts allege misstatements and failures to disclose material facts in the 1970 Prospectus and the 1970 Proxy Statement. They are brought, respectively, under Sections 12(2) and 17(a) of the Securities Act (Count VII), Section 10 (b) of the Exchange Act and Rule 10b-5 thereunder (Count VIII), and Section 14 (e) of the Exchange Act (Count IX). The alleged untruths and omissions include the failure to disclose that the 1968 Reorganization was not a valid statutory merger under Maine law and the failure to disclose that the figures on which were based the relative "exchange ratios" used in the 1970 Acquisitions were out of date and inaccurate, resulting in the apportionment of a...